Global supply chains need SaaS to drive competitive advantage

In his 1985 book, Competitive Advantage, Michael Porter introduced the concept of the value chain. The premise is that people and processes add value at every step of the product life cycle—from procurement of raw materials to order fulfillment—to the extent that each step is optimized. As such, the final value added is greater than the sum of the steps.

Over the years, Porter's ideas evolved into a dictum that businesses can achieve profitability by getting the “right product to the right people at the right time.” But this goal must operate in parallel with the more fundamental strategy that says “sell more and cut costs.”

With a major shift of U.S.-based manufacturing offshore, and the pervasiveness of the Internet to support e-commerce, manufacturers today must be able to compete within a value chain that is at the same time a global supply chain.

In this scenario, inbound logistics, demand management, order fulfillment, manufacturing flow management, supplier relationship management, and reverse logistics all take on entirely new dimensions. The ownership of the underlying data and transactions that support these processes is more widely distributed, making integration of people, processes, and information more complex and important than ever.

The challenge is that technology has changed the rules of engagement, enabling more manufacturers and suppliers to participate in the global supply chain. Competitive advantage goes to companies that focus resources on core competencies and products with strong differentiation, while finding ways to reduce supply chain costs.

Manufacturers and suppliers have for years invested in infrastructure and in-house expertise for electronic data interchange (EDI) to support trading relationships—primarily the exchange of orders and invoices with key customers—or they get by with just the basics from a service bureau.

Today, a new delivery model—Software-as-a-Service (SaaS) for EDI—can provide a service-based solution for middle-market suppliers and manufacturers to meet complex and ever-changing requirements mandated by their large trading partners.

Many trading partners are requesting that suppliers synchronize product information according to global standards and provide advance shipping notices accompanied by bar-code labels and RFID tags. Product and shipping information aren't the only elements of increasing complexity. The “big box” store phenomenon and the Internet spawned new models of consumer behavior that, in turn, have resulted in new supply chain processes that must be supported by manufacturers.

For example, suppliers of consumer packaged goods to big box retailers must support three types of order processing and fulfillment:

• Product to distribution centers;
• Product direct to stores (Wal-Mart has more than 5,000 ship locations); and
• Internet-based orders shipped directly to the consumer.

In addition, many retailers know they can shift costs back to the manufacturer for “special order” products, where the manufacturer holds the inventory and ships directly to consumer upon receipt of an order.

Finally, over the last few years, suppliers and manufacturers have cut costs by shutting down internal manufacturing and warehouse operations and shifting to offshore manufacturing and third-party logistics providers.

However, it also costs money to adhere to global standards for product descriptions, share information with remote manufacturing and warehouse facilities, and link processes and transactions in a global supply chain. The infrastructure and expertise needed often aren't fully understood. As a result, companies underestimate the total cost of ownership (TCO) of managing these processes.

SaaS is gaining popularity as an alternative to maintaining certain kinds of functionality and systems internally. Essentially it involves software developed as a Web-native application and delivered as a service over the Internet. Customers don't purchase and implement this software, but rather pay to use its functionality. Without large initial investment or complex maintenance, a user experiences greater benefits than with licensed software operated on-premise.

SaaS works well in areas where best practices already are in place, and where new functionality may be needed, such as ERP, messaging, and customer relationship management.

One of the big attractions to SaaS is reduced cost. The Software and Information Industry Association estimates the annual cost to own and manage software applications can be up to four times initial cost. Industry analysts like Stamford, Conn.-based Gartner and Framingham, Mass.-based IDC have published research that shows 70 percent to 75 percent of annual IT budgets are allocated to the maintenance of existing systems.

Admittedly, it can be challenging to compare total cost of ownership for SaaS versus on-premise solutions because the comparison cannot be exact. This is especially true when assessing costs for EDI and global data synchronization (GDS), as they cross the boundaries of multiple business processes and solutions with varying degrees of integration needed to support the order-to-cash life cycle.

One way to evaluate and compare TCO is to examine resource requirements for infrastructure and professional services for the start-up/deployment phase, as well as ongoing requirements.

The hallmark of a comprehensive SaaS solution for EDI and GDS should be “out of the box” integration with ERP. The SaaS solution must combine a true service architecture and a high degree of software standardization with strong vertical specialization. These components allow manufacturers and suppliers to implement full transaction support with trading partners in a matter of a few weeks versus the usual six to nine months it takes to implement an on-premise system with the same level of functionality.

Pricing models can vary, but usually the customer pays a one-time, modest configuration fee and going forward, pays only for the transactions processed—an “on-demand” variable expense. The ongoing fees may be either by subscription or transaction, or some combination of both.

It is clear that one of the most important benefits of SaaS is the rapid implementation times and resulting acceleration of ROI for the customer. By incorporating global standards for managing EDI and global data synchronization requirements into a single interface, SaaS solutions comprise an ideal architecture for companies of all sizes.

SaaS-based applications also allow companies to stay ahead of the curve to meet the ever-changing supply chain market requirements and industry initiatives necessary to compete successfully in today's global economy.